Factoring Your Stocks into Your Tax Planning

Stock trader board with Buy and Sell diceWith 2020 nearing its end, now is the time to begin planning for the 2021 tax season. Everyone can benefit from proper tax planning, which enables you to look ahead and make last-minute financial decisions that can minimize your taxes. For those with stock portfolios, this tax planning is especially important. Here are some important things to consider in regards to your stocks and how they’ll impact your tax planning.

Balancing Gains and Losses

If you’re considering selling some of your stocks for a significant gain before the end of the year, it may be worth selling some of your less successful stocks at a loss as well. This can help to balance out your gains, which can minimize the amount that you’ll pay on the sale of your stocks.

For example, let’s say you purchased 200 shares of Company X and 200 shares of Company Y, each for $100 per share. Company X’s stock is now worth $200 per share, so you want to sell 100 of your shares for some extra cash. This would give you a net gain of $10,000 on those shares of your stock. You will be taxed on that gain in your stock. Company Y’s shares have dropped, and are now only worth $50 per share. If you sell all of the stock you purchased in Company Y, you would have a net loss of $10,000, balancing out your gains on Company X’s stock and negating the taxes on your stock sales.

Of course, nobody really wants to sell their stocks at a loss. But, if you have any significant gain in stock sales this year, you can expect an increase in your taxes on your next return. And if your tax planning indicates that you’ll owe more than you can effectively manage to pay on time, it may be worth selling at a loss to reduce what you owe. Plus, liquidating that asset (even at a loss) can make it easier to pay your tax debts.

Donating Stocks

As we near the holiday season, you’ll probably be giving to a few charities in the spirit of giving. And, of course, you probably know that donations to qualifying charities give you a tax write-off on your tax return. But did you know that you can actually donate your stocks to charities just as you would donate cash? Let’s use another example to demonstrate how this works and what the benefits are:

You have 200 shares of Company X, which you purchased for $100 a share, as mentioned above. You know that you’ll want to make a significant donation to a local charity this holiday season. You could sell half of your stock in Company X, which is now worth $200 a share, and donate the $20,000 you would get to your charity of choice. However, this would give you a $10,000 gain on your income, which you would be taxed on. While you would get a deduction for your donation, you’d still pay additional taxes on your $10,000 gain.

Or, you could donate the stocks themselves to the charity instead. This signs ownership over to the charity in question, so they immediately gain $20,000 in stocks, the full amount of which you can claim as a charitable donation—despite the fact that you only paid $10,000 on those stocks when you bought them. This allows you to avoid paying tax on the gain of the stocks while maximizing the benefit you receive from your chartable giving.

Considering Wash Sales

Many people in the past took up the practice of “wash sales.” This involved selling stocks at a loss at the end of the year, only to immediately purchase the same stocks again after New Year’s. This allowed those individuals to report a loss on stock sales when they filed, but still let them keep possession of those stocks. While this might sound like a great idea, the IRS caught onto the practice several years ago.

There are now laws in place that prevent you from immediately repurchasing the same stocks after selling them at a loss. Under these new laws, you must wait at least 30 days before repurchasing stock in a company in which you have recently sold stocks. Otherwise, you cannot claim the loss on your tax return.

It’s important that you take all of your financial assets into consideration when doing your year-end tax planning. When handled the right way, your stocks can be a valuable tool to help minimize your taxes in the coming year. However, doing so can get complicated. Contact us to learn more about how your stocks are taxed, and for assistance with tax planning before the end of the year.